20458 EEF Manufacturing Outlook December 2014.indd

MANUFACTURING
OUTLOOK
DECEMBER 2014
EEF’s snapshot survey of business conditions in engineering
and manufacturing companies
In partnership with
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Contents
Foreword1
Introduction2
Manufacturing roundup
3
Recent trends
4
Sector trends
6
Regional trends
7
Economic environment
8
Future trends
10
Sector forecasts
11
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Manufacturing Outlook December 2014
1
Foreword
Welcome to the final edition in 2014 of
Manufacturing Outlook, our quarterly report on
trends in UK manufacturing produced by EEF in
partnership with BDO. Our survey results for the
year as a whole have evolved much as we expected
at the start of this year. Our forecast was for a solid
rate of growth across manufacturing in 2014 and
that is what we have seen.
Looking to next year, confidence in the outlook
has moderated somewhat. Forward-looking balances
may have slipped back but almost four in five
manufacturers are planning for output levels and
new orders to be the same or higher in the first
three months of 2015. And these trends will
continue to support further growth in investment
and recruitment of skilled workers.
Positive balances on a host of indicators have
dominated our reports this year and the most recent
quarter is no exception. Manufacturing will see the
year out with rising production levels, a growing
order book and further plans to invest and expand
the workforce. But the pace of growth at the end
of the year has clearly weakened compared to that
seen in early 2014.
Cementing these trends not just in 2015, but for the
long-term, should be a priority in the government’s
forthcoming Autumn Statement. Investment in
infrastructure, innovation and workforce skills as
well as the need to maintain a stable and competitive
tax system require continuing efforts from this
government and the next if manufacturing is to play
an ever greater role in a better balanced economy.
Overall, there is good news for the sector as a whole,
but there are some weak points that have become
established throughout the course of 2014. This first
is a patchier sector performance underneath the
manufacturing headlines. In the past three months
we again see sectors such as motor vehicles and
electronics reporting strong trading conditions,
while basic metals continues to face challenges.
Lee Hopley, Chief Economist, EEF
Tom Lawton, Head of Manufacturing, BDO LLP
Secondly, manufacturers are struggling to secure
growth in sales to export markets. In the past six
months a balance of companies has been reporting
falling new export orders – a sign that the weakness
in the UK’s trading performance over the past few
years is unlikely to turnaround in the short-term.
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Manufacturing Outlook December 2014
2
Introduction
• Output balance picks up in the final months of 2014.
• New order intake remains stable, but exports
disappoint again.
• Manufacturers set to enter 2015 with more
modest expectations.
• But activity levels continue to support investment
and job creation.
• Growth of 3.5% expected this year and 2.0% in 2015.
In line with the generally weak picture on inflation
and input prices there has been little movement once
again in pricing by manufacturers over the past three
months. With Sterling coming off the highs against
the dollar seen in July and August this year, there
appears to be less pressure on margins on overseas
sales with the balances of responses on this measure
recovering somewhat in the past three months.
Manufacturing growth has continued, uninterrupted
for six consecutive quarters and the most recent data
from the Office for National Statistics showed that
output levels expanded by 0.4% in 2014q3. Our
latest survey indicates that the sector will end 2014
on a positive note, with the balance of responses on
output from manufacturers edging higher for the
past three months to 17%.
Overall, our survey reports a solid picture of
manufacturing activity as we head into 2015, but
rates of expansion are clearly lower than those seen
earlier in the year. Official data so far in 2014
confirm that manufacturing is on track for growth
of 3.5% in 2014. While we are forecasting quarter
on quarter growth to persist through next year, the
annual growth rate is set to moderate to closer to
2%. Across the economy as a whole we predict
growth of 3% in 2014, followed by 2.6% next year.
The sector breakdown on output changes over the
quarter was more even than in the previous three
months, with only basic metals seeing a net balance
report a fall in production. The news on exports
was less positive, however, with most manufacturing
sectors (except electronics and vehicles) posting
negative balances on new overseas orders.
Across manufacturing as a whole, this was the
second quarter running in which companies
reported a negative balance on export orders and
continued the declining trend in export sales seen in
official data through most of this year. Offsetting
this, however, was another positive quarter for
domestic orders. A balance of 11% of manufacturers
increased their UK orders in the past three months,
up from 3% in the previous quarter.
On all of the output and orders indicators the outturn
this quarter was, once again, weaker than the positive
expectations in the previous quarter. Throughout
2014 reality has tended to fall short of short-term
predictions and this could be a factor in the decline
in the forward-looking balances this time around. In
the next three months a balance of 10% of companies
is planning for an increase in output compared
with 22% last quarter. There has been a similar
adjustment in expectations for new orders growth.
Nevertheless, manufacturers continue to report
robust investment and recruitment plans. In the
past three months a balance of 21% of companies
increased employment with a balance of 13% planning
to do so in the next three months. In addition,
investment intentions also held firm with a balance
of 16% planning for an increase in expenditure,
down fractionally from 17% last quarter.
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Headline survey results
% balance of change
Output
Total orders
Employment
Export prices
Export margins
Cashflow
Past 3 months
17
10
21
-4
-13
15
Next 3 months
10
6
13
-9
-20
2
Source: EEF Business Trends Survey
Economic data during survey period
29 October – 19 November
Start
1.27
1.61
87.5
86.91
€/£
$/£
£ index
Oil price (Brent Oil $/bl)
End
1.25
1.57
86.2
77.21
Sources: Bank of England and Energy Information Agency
Key economic forecasts
% change except where stated
GDP
Inflation – CPI
Inflation – RPI
World trade
BoE base rate (%)
2012
0.7
2.8
3.2
1.8
0.5
2013
1.7
2.6
3.0
2.2
0.5
2014
3.0
1.6
2.5
4.4
0.5
2015
2.6
1.3
2.4
4.8
0.6
2016
2.5
1.9
3.5
5.6
1.3
Source: Oxford Economics
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Manufacturing Outlook December 2014
3
Manufacturing roundup
Chart 1
Manufacturing posted its sixth consecutive quarter
of growth in the three months to September 2014
and compared with a year ago output across the
sector was up 3.4%. The main contributing sectors
to the 0.4% expansion across manufacturing in the
most recent quarter were transport, electronics
and chemicals. Recently the Office for National
Statistics has made some substantial revisions to the
manufacturing production series and the return to
growth over the past 18 months leaves output now
4% below its pre-recession peak. This compares
relatively favourably with most of our key European
competitors.
Output growth still positive
% change past three months on a year ago
%
5.0
Index of production
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-1
2
ay
-1
2
Ju
l-1
2
Se
p1
No 2
v12
Ja
n13
M
ar
-1
M 3
ay
-1
3
Ju
l-1
3
Se
p1
No 3
v13
Ja
n1
M 4
ar
-1
M 4
ay
-1
4
Ju
l-1
4
Se
p14
ar
M
M
Ja
n-
12
-3.0
Sources: National Statistics
Chart 2
Exports to most regions have fallen back
% change past three months on a year ago
%
25.0
EU
Asia
North America
To tal
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
13
Se
p13
Oc
t-1
3
No
v13
De
c13
Ja
n14
Fe
b14
M
ar
-1
4
Ap
r-1
M 4
ay
-1
4
Ju
n14
Ju
l-1
4
Au
g14
Se
p14
3
l-1
g-
Au
Ju
Ju
n-
13
-20.0
Total manufactured exports fell again in 2014q3,
the third consecutive quarter of decline. This further
fall left the value of manufactured exports some
3% lower than a year ago. As we have previously
highlighted the global economic environment has
been more challenging for exporters this year
and this is reflected in declines in sales to most of
the UK’s major export markets over the past year.
However, it does appear that the pace of decline has
levelled out and sales to North American customers
were showing signs of returning to growth in the
third quarter. Nevertheless, the continuation of
negative balances for export orders in our survey
suggests that a significant turnaround in the official
data is not in prospect in the short-term.
Source: UK trade info
Chart 3
The Office for National statistics have produced new
estimates for manufacturing business investment,
which now includes companies’ expenditure in areas
such as ICT and intellectual property assets. The
data shows a steady recovery in overall investment
levels since the 2008/9 recession with spending
across the broad range of investment categories
exceeding its 2008 peak. Average annual growth
rates have been strongest in plant and machinery
investment – critical to improved productivity and
in line with the positive intentions to invest reported
in our survey since 2010.
Manufacturing investment recovers
Investment by asset, chained volume measure
£bn
30
Machinery
Intellectual property
Buildings
25
20
15
10
5
0
2008
2009
2010
2011
2012
2013
Source: National Statistics
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Manufacturing Outlook December 2014
4
Recent trends
Chart 4
Output and orders end the year strongly
% balance of change in past three months
%
40
Output
Orders
30
20
10
0
-10
-20
-30
-40
14
q4
20
20
14
q2
q4
q2
13
20
q4
20
13
q2
12
12
20
20
20
11
q4
q2
q4
20
11
q2
10
20
q4
20
10
q2
09
20
09
20
20
08
q4
-50
-60
Source: EEF Business Trends Survey
Manufacturing activity picked up this quarter after
softening in the previous quarter. A balance of 17% of
companies reported an increase in output compared
with 10% in the previous quarter. New orders
remained steady with a positive balance of 10%
unchanged from q3. The figures reflect a slowdown in
manufacturing activity for the second half of the year
after solid performance in the first two quarters. This
is consistent with National Statistics that show GDP
and manufacturing growth cooled over the second
half of 2014 as uncertainty surrounding the global
economy started to hit domestic businesses. Overall,
q4 results confirm a strong year for manufacturing
with the balance of companies reporting increased
output extending the run of positive responses to
seven consecutive quarters.
Chart 5
Demand remains a domestic matter
% balance of change in orders in past three months
%
40
Domestic
Export
30
20
10
0
-10
-20
-30
-40
-50
q4
14
14
20
q2
q4
13
20
20
q2
q4
20
13
12
q2
12
20
11
20
20
q4
q2
q4
11
20
q2
10
20
10
q4
20
q2
09
20
09
20
20
08
q4
-60
Orders continue to be driven by domestic demand
with the balance of companies reporting an increase
at 11%. After a sharp drop last quarter, domestic
orders rebounded closer to q2 levels. Export orders
remain a drag, with the negative balance of -4%
in q3 narrowing only marginally to -3%. This
divergence is in line with expectations given that a
weak global growth environment and stagnation in
the eurozone mean that the UK recovery has been
hinging on domestic demand. This is particularly
true for the second half of the year where mounting
geopolitical uncertainty has taken its toll on business
sentiment. This can be seen in disappointing growth
figures across all major economies over the past few
months.
Source: EEF Business Trends Survey
Chart 6
Pressure on margins eases slightly
% balance of change in margins in past three months
%
20
Domestic
Export
10
0
-10
-20
-30
-40
q4
14
q2
14
20
13
q4
20
q2
20
q4
13
20
12
q2
12
20
q4
20
q2
20
11
q4
11
20
10
q2
20
q4
10
20
q2
09
20
09
20
20
08
q4
-50
Source: EEF Business Trends Survey
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The squeeze on margins carried over to q4, albeit
easing slightly from the previous quarter. The
balance of companies reporting a decline in margins
on domestic orders fell marginally from -10% to
-9%. Margins performed strongly in the first half of
the year before falling back in the third and fourth
quarters. Nevertheless, falling input costs – mostly
driven by the rapid decline in fuel prices – and solid
domestic demand will have contributed to the slight
improvement in the past three months. Export
orders saw a substantial improvement with the
balance rising to -13% from -23% in q3. This is
mostly down to a depreciation in Sterling relieving
pressure on export margins after large gains in q3
were reversed.
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Manufacturing Outlook December 2014
5
Chart 7
The recruitment balance remained firmly positive
in 2014, building on the increases in employment
reported in 2013 as manufacturers continued to take
on employees to cope with increased manufacturing
activity. The balance of companies reporting an
increase in employment edged up to 21% in q4
after falling back to 18% in the previous quarter.
This trend tracks National Statistics where quarterly
employment growth slowed between q2 and q3. The
growth in employment was broadly sector-wide with
only basic metals and chemicals reporting negative
balances for q4. This was expected as both sectors
have experienced a more challenging 2014 both in
terms of output and orders, than the average across
manufacturing.
Recruitment holds strong
% balance of change in employment in past three months
%
40
30
20
10
0
-10
-20
-30
-40
q4
q2
14
14
20
20
q4
q2
20
13
q4
20
13
q2
12
20
q4
12
11
20
20
q2
q4
20
11
q2
10
20
q4
20
10
q2
09
09
20
20
20
08
q4
-50
Source: EEF Business Trends Survey
Chart 8
The investment balance came at an all-time high for
2014 as business confidence in the UK’s economic
recovery becomes more firmly rooted. However, the
balance of investment intentions continued to ease in
q4 after falling to 16% from 17% in q3. This softening
of investment intentions reflects a scaling back in
expectations after a strong first half in the year.
The squeeze in margins over the last two quarters in
combination with an increasingly uncertain global
outlook has worked to somewhat dampen capital
expenditure plans. Growth in business investment
has also been stronger in recent years which could
also be limiting the scope for further significant
growth across the sector.
Investment intentions topped out in 2014
% balance of change in investment plans
%
40
30
20
10
0
-10
-20
-30
-40
q4
14
q2
14
20
13
q4
20
q2
20
q4
13
20
q2
12
12
20
q4
11
20
20
q2
q4
10
11
20
q2
20
q4
10
20
09
q2
09
20
20
20
08
q4
-50
Source: EEF Business Trends Survey
Summary: past three months
% balance of responses (% up minus % down)
Total output
UK new orders
Export new orders
Total new orders
Employment
Capital expenditure plans
Average price of domestic orders
Average price of export orders
Margins on domestic orders
Margins on export orders
Levels of cashflow
q2
20
9
11
17
21
15
8
4
-14
-14
-3
2012
q3
4
-6
2
3
16
15
-1
-5
-19
-23
2
2013
q4
0
-4
-8
3
0
10
-6
-8
-18
-21
-8
q1
-1
-7
-7
-3
4
13
1
-2
-10
-11
2
q2
12
3
1
7
11
7
3
0
-8
-7
0
2014
q3
32
20
15
27
12
24
-2
1
-7
-1
11
q4
19
15
7
18
10
27
1
-4
-10
-7
8
q1
22
16
16
20
30
34
25
23
12
8
3
q2
26
16
9
19
23
28
5
2
-7
-9
7
q3
10
3
-4
10
18
17
-5
-12
-10
-23
-8
q4
17
11
-3
10
21
16
-4
-4
-9
-13
15
Source: EEF Business Trends Survey
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Manufacturing Outlook December 2014
6
Sector trends
Chart 9
Almost all manufacturing sectors reported that
output increased in the last three months. As with
last quarter, the motor vehicles sector reported
the strongest outturn, with a balance of 50% of
companies saying output had grown. However, after
reporting falling output last quarter, electronics
manufacturers were more positive. A balance of 40%
of electronics companies said output increased, in
line with recent statistics which show the sector has
grown 7.6% in the year to date. The only sector to
report falling output was basic metals, which also
reported negative balances across a range of other
areas, including both domestic and export orders.
Manufacturers in the sector have been particularly
affected by a stronger Sterling, which has encouraged
imports of metals and made exports less competitive.
Almost all sectors see output growing
% balance of change in output in past three months
%
60
2014q3
2014q4
50
40
30
20
10
0
-10
Ve Mo
hi tor
cle
s
ics
El
ec
tro
n
ec
tri
ca
l
El
pr M
od eta
uc l
ts
l
ica
ha
n
ec
M
m Bas
et ic
al
s
-20
Source: EEF Business Trends Survey
Chart 10
Mixed sector picture on export demand continues
% balance of change in orders in past three months
%
40
UK orders
Export orders
30
20
10
0
-10
-20
Ve Mo
hi tor
cle
s
tra O
ns th
po er
rt
M
Eq ech
ui an
pm ic
en al
t
pr M
od eta
uc l
ts
eq Ele
ui ctr
pm ic
en al
t
m Bas
et ic
al
s
-30
Source: EEF Business Trends Survey
The picture of greater strength in the domestic
markets compared with weakness in export markets
has continued this quarter. Those sectors that have
seen export demand weaken fall into two groupings:
firstly, metals sectors – impacted by exchange rate
movements – and secondly mechanical and electrical
equipment. For these latter two sectors, the weakness
in the European industrial sector will have been
subduing demand. In contrast, the transport
equipment sectors – motor vehicles and other
transport – have both reported strongly positive
export demand in the past three months. Motor
vehicles has benefited from a slight pick-up in demand
in Europe and higher levels of exposure to emerging
markets, while other transport – which is
predominantly aerospace – benefits from long-term
orders cycles.
Sector summary
% balance of responses (% up minus % down)
Past three months
Output
Basic metals
Metal products
Mechanical
Electronics
Electrical
Motor vehicles
Other transport*
Food and drink*
Chemicals*
Rubber and plastics
Non-metallic minerals
Next three months
Total orders Employment Export price
-15
26
8
40
29
50
–
–
–
8
17
-8
12
1
44
0
31
–
–
–
42
27
-15
30
31
44
24
25
–
–
–
33
17
-13
-3
-3
10
-6
-6
–
–
–
-13
-9
Cashflow
Output
6
26
24
30
-8
0
–
–
–
27
-50
-23
0
10
50
36
43
–
–
–
8
9
Total orders Employment Export price
-12
0
4
33
18
33
–
–
–
42
36
-8
13
18
33
5
33
–
–
–
25
17
-14
-7
-8
0
-11
-13
–
–
–
-25
0
Cashflow
-27
-11
9
30
42
10
–
–
–
9
-25
* Insufficient data Source: EEF Business Trends Survey
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Manufacturing Outlook December 2014
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Regional trends
Chart 11
No region reports falling output in this quarter’s
survey
% balance of change in output in past three months
%
80
70
60
50
40
30
20
10
0
-10
2014q2
2014q3
2014q4
Lo
Ea
nd
st
er
on
n
r
be
m
Hu
an
d
&
ks
SE
Yo
r
Ea
W
es
st
tM
M
id
id
la
la
nd
nd
s
s
st
Ea
rth
No
So
No
ut
h
rth
W
es
W
es
t
t
-20
-30
In this quarter’s Business Trends survey, no regions
reported that output fell in the last three months. In
fact, only one region was not positive: manufacturers
in the North West reported a zero balance with
regards to output. This was an improvement from
last quarter’s survey, where a balance of 22% of
companies reported that output fell. Manufacturers
in the South West – who reported a zero balance in
last quarter’s survey – also reported an improvement
this time, with a balance of 14% of companies saying
output increased. This quarter, the strongest region
was the South East and London, where a balance of
67% of manufacturers said output increased in the
last three months. The region is also the most
positive about output in the next three months.
Source: EEF Business Trends Survey
Chart 12
In this quarter’s Business Trends survey, there was a
strong degree of regional variation with regards to
the outlook for orders. In addition to strong output
balances, manufacturers in the South East and
London are most optimistic about the next three
months; both export domestic and export orders
are expected to rise strongly. In contrast, a balance
of 32% of companies in Yorkshire and the Humber
expect orders to fall in the next three months. While
UK and export orders are both expected to fall,
overseas demand is expected to be particularly weak.
A range of expectations about orders outlook
% balance of change in orders in next three months
%
40
2014q3
2014q4
30
20
10
0
-10
-20
nd
on
an
d
Lo
nd
s
SE
st
er
n
W
es
tM
id
la
id
l
Ea
st
M
h
ut
So
Ea
an
ds
t
W
es
Ea
rth
No
rth
No
Yo
r
ks
&
Hu
m
W
es
be
t
r
-40
st
-30
Source: EEF Business Trends Survey
Regional summary
% balance of responses (% up minus % down)
Past three months
Output
SE and London
Eastern
South West
West Midlands
East Midlands
Yorks & Humber
North West
North East
Scotland
67
19
14
32
33
40
0
23
0
Next three months
Total orders Employment Export price
67
13
10
13
19
26
4
-15
2
13
6
29
39
0
50
17
31
14
0
0
0
-15
0
-6
-15
-9
-3
Cashflow
Output
60
6
5
23
-5
25
-4
-15
–
47
-13
23
3
0
-30
9
-8
16
Total orders Employment Export price
33
13
5
14
10
-32
0
0
19
7
25
19
17
11
-10
14
0
12
-29
-7
6
-13
-7
-6
-17
-18
-9
Cashflow
29
6
5
0
16
5
-9
0
–
Source: EEF Business Trends Survey
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8
Economic environment
• ONS revisions reveal a better-balanced recovery.
• Labour market continues to improve but still
evidence of slack.
• Weak global growth and eurozone woes remain
key concern.
Solid growth despite slowdown
The UK economy continued to grow solidly in q3
despite slowing down from the 0.9% figure posted
in q2. Preliminary GDP estimates show that the
economy expanded by 0.7% over the quarter taking
the year-on-year growth rate to 3%. This means
that the economy is 3.4% above its pre-recession
peak and is on track to achieve the IMF forecast
of over 3% growth for 2014 – making the UK the
fastest growing economy in the G7.
Output increased in all four main industrial groupings
in q3. Services added 0.58 percentage points to
GDP growth with production and construction 0.07
and 0.05 percentage points respectively. However,
services remain the only output component to have
surpassed its pre-recession peak.
The slight slowdown in q3 growth rates is mostly
down to challenging conditions in overseas markets.
Solid UK growth has hinged on a strong domestic
market with consumer spending and investment
offsetting the drag by net trade. Investment rose by
7.1% between 2013q3 and 2014q3, reaching its
highest level since Q4 2007.
While investment is set to cool in the second half of
the year this should not dampen expectations going
into q4. This does not imply a decline in business
sentiment, rather the slowdown in investment reflects
smaller catch-up potential following ONS revisions.
The cumulative contribution of capital investment
(GFCF) to GDP growth since 2009q2 was positive,
painting a picture of a significantly more balanced
recovery than previously thought. The revisions
showed that the recession was less severe and the
recovery stronger than previously thought. GDP was
above its pre-recession peak by 2013q3 rather than
mid-2014, while the peak to trough fall during the
recession is now estimated at -6.0% compared to
-7.2%.
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A glimmer of hope for wages but slack remains
That is not to say that all is rosy in the UK economy.
Productivity growth remains sluggish, in terms of
output per hour, productivity was still 2.2% below
its pre-downturn level in 2014q2, and around 15%
below the projected path of productivity growth had
pre-recession trends been maintained.
Subdued productivity growth has gone hand in hand
with weak wage growth. Despite a benign inflationary
environment, wage growth only outstripped CPI
inflation for the first time in five years this September.
Wage growth is well below historical averages and
unit labour costs fell over the four quarters to 2014q2,
reflecting lingering labour market slack and slow
productivity growth.
The rapid decline in unemployment, now at 6%, has
not worked to significantly alter the Bank of England’s
view of spare capacity in the economy. While the Bank
argues that the margin of spare capacity has narrowed
slightly over the past six months, it remains at around
1% of GDP; that’s because the composition of
employment points to a concentration in lower-skilled
occupations – weighing on productivity and pay.
Chart 13
Investment revisions point to a better balanced
recovery
Gross fixed capital formation, contribution to GDP growth (percentage points)
%
4
Blue Book 2014
Previous
3
2
1
0
-1
-2
20
09
20 q2
09
20 q3
09
20 q4
10
20 q1
10
20 q2
10
20 q3
10
20 q4
11
20 q1
11
20 q2
11
20 q3
11
20 q4
12
20 q1
12
20 q2
12
20 q3
12
20 q4
13
20 q1
13
20 q2
13
20 q3
13
20 q4
14
q1
• UK economy grows solidly despite slight
slowdown in q3.
Source: National Statistics
Bleak global outlook weighs on UK growth
While the UK’s strong recovery has not washed away
all of its domestic issues – external factors continue to
pose the largest risk to the UK economy. The global
growth outlook remains weak with the IMF slashing
its global forecast again, this time by 0.1pp for 2014
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and by 0.2pp for 2015. The picture is one of an uneven
recovery – the US and UK are growing solidly, Japan
and the Eurozone are flat-lining, and emerging
economies are showing large variations in performance.
performance. The divergence in the economic outlook
of the UK and most other advanced economies
(notably the Eurozone) has meant that strong domestic
market conditions are propping up demand for imports.
Stagnation in the Eurozone presents the biggest hazard
for the UK. The Eurozone is engaged in a long-term
battle with deflation and low-to-negative growth. Data
on q3 performance provided some relief, with growth
in the Eurozone exceeding expectations at 0.2%. France
surprised on the upside but its economic fundamentals
remain weak and are set to constrain the pace of growth.
On aggregate, the UK’s trade deficit has worsened and
is set to continue to drag on growth for the foreseeable
future. Deviation in the path of monetary policy
between the UK and most overseas markets – the UK
is close to a hiking cycle while most of the rest are
easing – could compound the trade deficit via a further
appreciation in the pound. The global outlook in
conjunction with the Bank of England’s judgement of
slack in the domestic market is likely to push the first
rate hike well into 2015.
Chart 14
Global growth outlook appears weak
GDP growth forecasts (year-on-year % change)
UK Economic forecasts
% change except where stated
%
6
World
US
Advanced economies
5
UK
Eurozone
4
3
2
1
0
-1
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: IMF
Germany narrowly avoided a technical recession,
something which Italy could not prevent after contracting
for the third consecutive quarter. In response, the ECB
is expected to step up its Quantitative Easing program
in the beginning of next year. Outside the Eurozone,
Japan and Brazil followed Italy into a recession while
Asia’s biggest emerging economies – China and India
– performed strongly after cooling in Q2.
Elsewhere, Russia has been hit by dwindling investment
confidence following growing geopolitical uncertainty.
However, the effects of geopolitical strife in Ukraine
and the Middle East have largely been contained, with
energy prices falling on the back of the US energy
boom. Last month, the US became the global leader in
the production of petroleum, increasing the global supply
of fuel and driving crude oil prices down. Strong growth
in the US has provided for some counterbalancing
dynamic to weak growth in the majority of advanced
economies.
Net trade still a drag
A combination of low global demand and strong
domestic consumption has hurt the UK’s trade
Trading environment
Exchange rate (€/£)
Exchange rate ($/£)
Exports
Imports
Current account (% GDP)
Output
Manufacturing
GDP
Costs and prices
Average earnings
Oil price (Brent Oil $/bl)
Employment
Manufacturing (000s)
Rest of economy (000s)
Unemployment rate (%)
2012
2013
2014
2015
1.23
1.59
0.7
3.1
-3.7
1.18
1.56
0.5
0.5
-4.2
1.24
1.65
-0.7
-0.7
-4.7
1.29
1.59
3.0
3.2
-3.9
-1.3
0.7
-0.1
1.7
3.5
3.0
2.0
2.6
1.8
111.7
1.7
108.7
0.7
101.3
2.6
84.5
2,567 2,557 2,589 2,582
31,823 32,263 33,271 33,709
8.0
7.5
6.1
5.5
Source: Oxford Economics and EEF
International Economic forecasts
% change except where stated
France
Germany
Japan
US
Eurozone
China
India
World
2013
0.4
0.2
1.5
2.2
-0.4
7.7
4.7
2.4
GDP
2014
0.4
1.4
0.3
2.2
0.8
7.4
5.3
2.6
2015
1.0
1.6
0.8
3.0
1.2
6.5
5.7
2.8
2013
0.9
1.5
0.4
1.5
1.3
2.6
10.1
3.7
Inflation
2014 2015
0.6
0.9
1.0
1.1
2.8
1.6
1.8
1.9
0.5
0.7
2.1
2.2
7.6
6.6
3.2
2.9
Source: Oxford Economics
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10
Future trends
Chart 15
Expectations for the start of 2015 fall back
% balance of change in output and orders in next three months
%
50
Output
Orders
40
30
20
10
0
-10
-20
-30
-40
20
08
q4
20
09
q2
20
09
q4
20
10
q2
20
10
q4
20
11
q2
20
11
q4
20
12
q2
20
12
q4
20
13
q2
20
13
q4
20
14
q2
20
14
q4
-50
Source: EEF Business Trends Survey
Throughout 2014 manufacturers had been reporting
robust expectations for future growth in output
and orders. As we look to the start of 2015,
forward‑looking balances have moderated. In the
next three months the balance of responses on
output and orders has fallen back to 10% and 6%
respectively. These represent the weakest set of
results for the following three month period since
the end of 2012 and mark a substantial turnaround
from the average balances reported so far this year.
However, the very positive expectations have
continually fallen short of actual outturns so the
decline this quarter may be an adjustment to the
reality of trading conditions that have evolved over
the course of 2014.
Chart 16
The positive recruitment balances reported for
the next three months signal that companies have
sufficient confidence in the outlook and in the
strength of current activity levels within their
businesses to take on additional employees. While
there has also been a modest decline in the balance
of companies expecting to increase employment, the
result remains well above the long-run average across
the series. Encouragingly, recruitment plans for the
next quarter also remain positive for all size groups
across our survey. Given the positive run of official
employment data for manufacturing, the results
suggest there is scope for further increases in
manufacturing jobs in 2015.
Manufacturers planning further recruitment
% balance of change in employment in next three months
%
40
30
20
10
0
-10
-20
-30
-40
20
0
20 9q1
0
20 9q2
09
20 q3
0
20 9q4
1
20 0q1
1
20 0q2
1
20 0q3
1
20 0q4
1
20 1q1
1
20 1q2
11
20 q3
1
20 1q4
1
20 2q1
1
20 2q2
12
20 q3
1
20 2q4
1
20 3q1
1
20 3q2
1
20 3q3
1
20 3q4
1
20 4q1
1
20 4q2
1
20 4q3
14
q4
-50
Source: EEF Business Trends Survey
Summary: next three months
% balance of responses (% up minus % down)
2012
Total output
UK new orders
Export new orders
Total new orders
Employment
Average price of domestic orders
Average price of export orders
Margins on domestic orders
Margins on export orders
Levels of cashflow
q3
15
8
3
12
16
-1
-2
-15
-18
-6
2013
q4
4
-4
3
1
1
1
2
-13
-11
-11
q1
22
12
16
19
19
10
7
-1
-2
8
q2
23
12
10
16
14
1
2
-7
-5
-3
2014
q3
28
24
19
30
16
-2
-2
-5
-5
17
q4
25
20
7
19
16
6
2
-1
-3
9
q1
29
30
33
37
31
26
22
14
10
2
q2
34
24
16
32
27
7
1
13
-11
15
q3
22
16
22
20
17
-1
-8
-6
-17
5
q4
10
7
8
6
13
-3
-9
-15
-20
2
Source: EEF Business Trends Survey
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Manufacturing Outlook December 2014
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Sector forecasts
2014 has proved something of a mixed year for UK
manufacturing sectors. Although manufacturing as
a whole is forecast to have grown 3.5% this year,
there is much variation beneath this. Given the
weakness in major export markets – evident in this
year’s Business Trends surveys – those sectors with
the most exposure to the UK have generally been
the strongest performers. Looking ahead to 2015,
however, an increase in investment expenditure
should support growth as should improvements in
some of the UK’s main export markets.
Chart 17
All sectors softer after q1, but consumer goods
perform more consistently
quarterly % change in output
%
2.5
2014q1
2014q2
1.5
1.0
0.5
0.0
Capital
Not all consumer-facing sectors have performed
well, however, with textiles likely to contract in
2014 following a weak third quarter as a result of the
warm autumn. The arithmetic effect of this also
means that the sector is forecast to contract in 2015.
Intermediate goods: growing, if not glowing
Intermediate goods sectors such as metals and
chemicals tend to sell to a range of manufacturing
and other industries, meaning they benefit from
broad based growth, rather than any particular
area of demand. This is reflected in the metal
products sector, which should grow at a similar pace
to manufacturing as a whole in both 2014 and 2015.
2014q3
2.0
Consumer
Motor vehicles has continued its strong recovery,
despite temporary weakness in q3. This has been
supported both by UK demand, and demand from
emerging markets. As we move into 2015, UK
demand growth may be softer but new production
lines coming on stream and increasing demand
from European consumers should support further
expansion. We expect 9.5% growth in 2014, and
5.7% next year.
Intermediate
Source: National Statistics
Consumption has boosted growth to date
The strongest performing manufacturing sectors in
2014 have been those with the most exposure to
the domestic market, particularly those selling into
construction or selling to consumers.
Two sectors which exemplify this are non-metallic
minerals and rubber and plastics, which are on track
to grow by 12.8% and 12.2% respectively in 2014
and should continue to grow – albeit at a slower pace
– in 2015. Similarly, food and drink has benefited
from a strong consumer this year. While price wars
in supermarkets may hamper growth and margins
in 2015, large sporting events and a generally more
confident consumer will ensure the sector continues
to grow.
The base effects of a strong 2013 for the basic metals
sector should mean that growth is sustained in 2014;
however, underlying momentum for the sector has
softened, as is evident in our Business Trends survey.
Despite growing demand, manufacturers in the
sector have been hit by a stronger Sterling, with the
Sterling/lira exchange in particular having led to an
increase in imports from Turkey. Nonetheless,
export growth of higher-grade metals has continued
and we forecast modest growth of 1.2% in 2015.
Although chemicals should grow in 2014 and 2015
the sector’s growth rate will be limited as it includes
pharmaceuticals, which has had a challenging year.
As we reported in the last Manufacturing Outlook,
though the worst of the impact of the patent cliff is
now past, it will be some time before the impact of
new drugs coming on stream is felt, so growth in
2015 is likely to be modest, at 0.9%.
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Investment growth has also supported
improvements in 2014
The pick-up in UK business investment expenditure
over the course of this year provided a boost for the
mechanical equipment sector, and should continue
to do so as we move into 2015. In addition, the
sector’s high level of exposure to non-EU markets,
including the US, should support growth. We are
forecasting output to increase by 6.8% in 2014 and
4.1% in 2015.
Similarly, the UK electronics sector – which is
focused on components and capital equipment more
than consumer goods – saw a strong 2014, growing
by 8.0% this year, its fastest growth rate since 1994.
The sector should continue to grow into 2015, as
with mechanical equipment, it should benefit from
high levels of exposure to the US.
Not all investment goods sectors have had a strong
year, however, with uncertain economic conditions
limiting appetite for the kind of large-scale projects
that drive growth in the electrical equipment sector.
However, major infrastructure projects in the UK
should mean that prospects are stronger over the
next few years. After a contraction of 3.8% this year,
we expect growth of 1.7% next year.
A note on other transport
Official statistics suggest that other transport
equipment – which is primarily aerospace – will
contract this year, as a result of a particularly weak
first quarter. However, underlying performance
appears to have been stronger than the statistics
suggest, and going forward long-term orders should
continue to provide support for demand. We expect
growth of 5.0% next year.
Sector growth rates and forecasts
% change
2013
15.5
-3.4
-11.6
-0.4
-4.5
8.0
8.7
-2.0
-1.2
-2.9
-1.1
2.4
-4.6
-0.1
Basic metals
Metal products
Mechanical
Electronics
Electrical
Motor vehicles
Other transport
Food and drink
Chemicals
Rubber and plastics
Non-metallic minerals
Paper and printing
Textiles
Manufacturing
Output
2014
0.9
2.8
6.8
8.0
-3.8
9.5
-3.4
5.6
0.5
12.2
12.8
-1.1
-0.6
3.5
2015
1.2
3.2
4.1
4.2
1.7
5.7
5.0
2.4
0.9
2.0
4.0
1.9
-3.7
2.0
2013
-5.4
4.8
-4.6
-1.3
-2.2
5.1
-4.4
-0.2
-5.9
-3.7
-4.8
-2.7
-0.1
-0.4
Employment
2014
2.0
4.0
-0.1
-3.6
-6.1
1.0
3.5
1.6
6.9
2.7
-1.1
8.5
-5.2
1.3
2015
-2.7
1.1
0.7
-1.7
1.4
2.3
2.6
-2.7
-1.0
2.3
2.7
-3.6
-4.0
-0.3
Source: EEF and Oxford Economics
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To find out more about
this report, contact:
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industry and boost its ability to
make a positive contribution to
the UK’s real economy.
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Chief Economist
020 7654 1537
[email protected]
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Senior Economist
020 7654 1539
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to create policies that are in the
Felicity Burch
Senior Economist
020 7654 1542
[email protected]
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0845 250 1333
[email protected]
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been provided by EEF members.
Contributing to our surveys helps
to accurately reflect trends and
behaviours that shape the UK
manufacturing sector.
If you would like to participate
in future surveys, please
contact Amanda Norris in our
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To talk about any issues your
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be facing please contact:
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Head of Manufacturing
0121 352 6200
07778 343 346
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Copyright ©EEF December 2014
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